The Odd Couple: Singapore and Malaysia Team Up on Development Zone

A $28 billion port, tourism and industrial complex called Iskandar Malaysia is rising at the tip of southern Malaysia. It promises to knit together erstwhile rivals and, in so doing, reshape the regional economy

Visitors to the Malaysia-China Business Forum at the Persada Johor International Convention Centre view a large model of the Danga Bay area of Johor's Iskandar Development Region, in Johor Bahru, Malaysia, on July 5, 2007

When the creaky colonial-era carriages of the Keretapi Tanah Melayu railway still crept between Singapore and the Malaysian capital of Kuala Lumpur, the eight-hour journey felt like slipping back in time. Starting in the shadow of Singapore’s skyscrapers, the train rattled across the gray waters of the Strait of Johor. As it chugged northwest, glass and concrete gave way to jungle. Sprays of vegetation began to leap from the boles of the mossy banyans lining the tracks.

This rail journey is no longer possible — the train stopped running in July 2011, after Malaysia and Singapore resolved a dispute over which country owned a valuable parcel of the track. Now the thick tropical forest may also disappear: one of the most ambitious development projects in the world — a $28 billion port, tourism and industrial complex called Iskandar Malaysia — is rising at the tip of southern Malaysia. It is a massive endeavor that encompasses a territory nearly three times the size of Singapore. It promises to knit together erstwhile rivals and, in so doing, reshape the regional economy.

To compete with heavyweights like India and China, Southeast Asian nations are increasingly looking to pool resources like land, labor and capital. For Malaysia, Iskandar represents an opportunity to reverse a decade of lackluster growth and the flight of its most educated and enterprising citizens. After expanding by nearly 9% on average from the early ’90s until the 1997–98 Asian financial crisis, its GDP growth rate has slowed to roughly 5% over the past several years. Oil and gas production, the biggest driver of growth, has been tapering off for nearly 20 years, with Malaysia increasingly reliant on maturing fields. Until 2010, when a rebound began, foreign investment had also been slipping. Malaysia’s stock exchange, a darling of emerging-market investors in the early to mid-’90s, now lags behind the turnover and performance of the comparatively roaring bourses of Indonesia and the Philippines. “We’re at a crossroads,” says Idris Jala, a former executive with oil giant Shell who is now a Cabinet minister in charge of jump-starting Malaysia’s economy.

For Singapore, which has welcomed over half of Malaysia’s departing human talent and whose per capita GDP is now the third highest in the world, there is good reason to support its northern neighbor. A decade of rapid economic growth has pushed Singapore’s land and labor costs ever higher, threatening the city state’s competitive edge. Industrial land in Iskandar can cost less than a third of the price in Singapore, and manufacturing wages there are less than half. “There is a symbiotic relationship between these two countries,” says Lee Oi Hian, chief executive of palm-oil-plantation owner KL Kepong. Illustrating the point, the company is building a multimillion-dollar plant in Malaysia that will manufacture the fruits of its Singapore-based biomedical research. “It’s based on the law of comparative advantage,” Lee says.

Singapore and Malaysia may today appear to be joined by economic necessity, yet history has often driven them apart. In 1963, Singapore, led by its founding father Lee Kuan Yew, engineered a union of the two newly independent British colonies. Relations quickly soured. In a May 1965 speech that would alter the destinies of both nations, the then 41-year-old Lee rose in Malaysia’s Parliament to rebut earlier comments by Mahathir Mohamad, a junior parliamentarian in 1965 who would later become Malaysia’s Prime Minister. Lee made it clear that by joining Malaysia, Singapore had never agreed to Malay rule, it had agreed to Malaysian rule. “That was the turning point,” is how Othman Wok, one of Lee’s party colleagues, described the incident in the first volume of Lee’s memoirs, The Singapore Story. A few months later, on Aug. 9, 1965, Singapore was expelled from Malaysia.

That long-ago parliamentary skirmish may seem like ancient history, yet it echoes all the way down to Iskandar today. In 1971, Malaysia enacted its New Economic Policy, a sweeping affirmative-action program intended to bolster the economic position of Malays in Malaysia by reserving places for them in state universities and public housing, as well as requiring the country’s publicly listed companies to reserve 30% of their equity for Malays. The various quotas instituted by that policy have been quietly relaxed over the decades, and the goals of the original 1971 legislation have been subsumed under succeeding plans. And even though Malaysia began to shift away from its ethnically tilted approach to economic growth with the 1996 launch of its high-tech Multimedia Super Corridor project, analysts say Iskandar represents a critical milestone.

“Iskandar is the thin edge of the wedge,” says Azman Mokhtar, managing director of Khazanah Nasional Berhad, the $34 billion Malaysian sovereign wealth fund that planned and launched the megaproject in 2006. Noting the absence of the Malay-ownership quota for companies operating in the central business district of Iskandar, which is trying to attract industries such as financial services, education, tourism and health care, Mokhtar adds, “If it works in Iskandar, it works. It will be copied.” Within Malaysia, that is a brave position to take, as it has opened the current regime of Malaysian Prime Minister Najib Razak to attack from conservative Malays angered by the rollback of their old privileges. So far, the government has withstood the political heat.

Luckily for the Prime Minister, his position over Iskandar is largely shared by the country’s political opposition, led by former Deputy Prime Minister Anwar Ibrahim. “We are very clear [that the National Economic Policy] has outlived its usefulness,” says Parliament member Nurul Izzah Anwar, Anwar’s 31-year-old daughter, who entered politics after her father was imprisoned in 1999. (He was released in 2004, and is expected to run for political office in the next general elections.) “Iskandar is pretty impressive,” she says. “A huge chunk of it will succeed, if not entirely.”

This measured assessment so far appears to be correct. Though much of Iskandar is traversed by empty highways lined with palm-oil groves, multinationals like Seagate, Foxconn, Flextronics and Halliburton have moved chunks of their global manufacturing to various corners of this sprawling 855-sq.-mi. (2,210 sq km) zone. At its four-year-old factory that employs about 280 workers, Halliburton makes components for oil drills equal in technical sophistication to those made in Singapore, according to a plant manager. Yet manufacturing wages there are less than half of Singapore’s. So far, Iskandar has attracted $28 billion in investment commitments, according to the government, with about $12 billion of that already “realized” in ongoing or completed projects. “I’m under no illusion it’s a critical mass,” cautions Khazanah’s Mokhtar, who says the megaproject, due to be completed by 2025, is about a fifth done.

Will Iskandar keep up the momentum? Nobody doubts the project’s geographic advantages. With two ports straddling the Strait of Malacca and the South China Sea, it sits at the fulcrum of global trade. Its westernmost Tanjung Pelepas port, where global container line Maersk holds a 30% stake, ranked 16th in the world in 2010 (Singapore is No. 1), as measured by container traffic. In 2000, by contrast, it ranked a lowly 141. Eager to attract the children of a growing pool of expatriates, upper-crust British private school Marlborough College will open an Iskandar campus in August. Sea-facing condominium projects are mushrooming along Iskandar’s coast and being snapped up by Singaporeans. Though the prices of those condos are jumping, they still cost roughly a third of comparable properties in Singapore. Citigroup Malaysia chief executive Sanjeev Nanavati says that if transport links are improved between the two countries, by building more bridges or even a cross-border subway, then “Iskandar will explode.”

But shared economic benefit may not be enough to guarantee Iskandar’s success. Nearly half a century ago, Singapore also needed the flow of rubber and tin from Malaysia’s mines and plantations to fuel economic trade. Malaysia, in turn, needed Singapore’s banks and ports to finance and ship its goods. Despite this mutual dependence, their union broke over who was to be in charge. It could happen again if the two countries perceive their roles to be unequal. For Malaysia, which has more to lose if Iskandar founders, the train to a brighter future is leaving the station. It may be the country’s last.